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Lake Woebegone mortgages

Americans largely support assistance to those facing foreclosure on their homes, but also display conspicuous signs of ambivalence.

Several polls, asking the question in different ways, find support ranging from 57 to 67 percent. Yet voters are clearly troubled by the prospect. Americans were evenly divided when Pew asked whether providing such assistance was the “right” or “wrong thing to do”; 83 percent were at least “bothered” by the idea; Gallup reported a majority saying such assistance was “unfair”; while 68 percent labeled assistance to distressed homeowners “unfair” in response to a different Quinnipiac question.

While voters are much more likely to blame lenders than borrowers (62 percent to 25), Americans nonetheless resent bailing out homeowners who they believe took on more mortgage debt than they could reasonably afford.

Since, like the children of Lake Woebegone, most Americans feel endowed with well-above-average ability, voters believe they would not have succumbed to the same errors. Many of them are wrong, however.

In 2005, we conducted research for a lender that did not offer exotic mortgages and found that most borrowers had no idea what they were getting into — except the best house they could “afford.” Critics pooh-poohed the results as originating with a self-interested corporation — which they did. But if the critics had spent a little less time attacking the entity sponsoring the research and a bit more time focusing on the substantive results, a multitrillion-dollar disaster might have been avoided.

In truth, selecting appropriate mortgage terms requires a set of calculations and predictions that are quite difficult for most people, apparently including Wall Street executives.

At the very simplest level, about a third of American adults cannot calculate 10 percent of 1,000. Similarly, a national survey asked respondents to suppose that they “had $100 in a savings account and the interest rate was 2 percent per year. After 5 years how much do you think you would have in the account if you left the money to grow?” Given just three simple choices, only a third could offer the correct response—“more than $102.”

Before (my very few) smug readers lament the intellectual mediocrity of the masses, while wryly smiling at their own superiority, I hasten to add that similar innumeracy problems plague sophisticated professionals. A group of gynecologists in a continuing medical education course was given information about the prevalence of a disease and the rates of false negatives and positives on an appropriate test. Only 21 percent could correctly answer a patient’s question about the probability of her having the disease, given a positive test result.

Mortgage decisions require not only statistical calculations, but also predictions about one’s future income, market conditions and the like. Here investment professionals themselves prove both overconfident and inaccurate. I shouldn’t need to cite studies — just look at the vast loss of wealth incurred by these sophisticated wheeler-dealers recently and you know their forecasting skills are weak, at best.

Studies confirm what is now obvious. Eighty-one percent of entrepreneurs in one survey rated the likelihood of success for their new venture at better than 70 percent, with a third literally 100 percent certain of success. Given that only about 30 percent of new businesses survive, that’s a lot of overconfidence and inaccurate prediction. In 2005, nearly half of money managers predicted the assets under their control would increase by over 20 percent in the ensuing five years. Since the market has lost about 50 percent of its value since then, there is probably not a single one of those asset managers who met his or her expectation.

Human beings are born with limitations. Greater understanding of the weaknesses and foibles we all share may generate a little more compassion for homeowners caught in the vise of this particular crisis.

Mellman is president of The Mellman Group and has worked for Democratic candidates and causes since 1982. Current clients include the majority leaders of both the House and Senate.